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Rating Action:

Moody's affirms Osmose's B2 CFR; rates bank debt B2

10 Jul 2014

Approximately $260 million of new bank debt rated

New York, July 10, 2014 -- Moody's Investors Service has affirmed Osmose Holdings Inc.'s B2 Corporate Family Rating ("CFR") and assigned B2 ratings to the company's proposed senior secured credit facilities. The rating outlook is stable.

"Expectations for more stable cash flows offset the modest increase in leverage and contraction of Osmose's business profile following the company's planned divestiture of two businesses," said Ben Nelson, Moody's Assistant Vice President and lead analyst for Osmose Holdings Inc.

Osmose plans to sell the wood preservation chemicals and railroad services business to Koppers Holdings Inc. (Ba3 stable) for $460 million. Proceeds will be used to fund a distribution to the company's private equity sponsor and reduce secured debt from about $400 million to $235 million -- comprised of a new first lien senior secured term loan. The new term loan, along with an undrawn $25 million revolving credit facility, will be the preponderance of debt remaining in the capital structure. Moody's estimates relatively weak initial pro forma financial leverage in the low 5 times (Debt/EBITDA) and owing to low-cost bank debt, relatively strong interest coverage in the low 3 times (EBITDA-CapEx/Interest).

Moody's believes that the company will have a more stable operating profile in the long-term despite a much-smaller revenue base following the completion of the proposed divestitures. The chemicals business being sold is tied to the cyclical housing industry, particularly residential remodeling; exposed to fluctuations in the price of copper, a key raw material for most products; and competes in an industry with uncertain competitive dynamics and much stronger competitors. The remaining utilities services business has more stable customers and favorable long-term trends including tightening regulatory requirements, aging utility infrastructure, and increased customer outsourcing of maintenance and repair services. New contract signings, combined with recent bolt-on acquisitions and modest reduction in corporate overhead consistent with the company's smaller profile, support our expectation for revenue growth and margin expansion in 2014 and 2015. Moody's believes that the expected improvement in operating performance, combined with free cash flow in the mid single digit range (FCF/Debt), will enable the company to reduce leverage by at least a full turn by the end of 2015.

However, the company's historical disposition toward acquisitions and shareholder returns suggest a willingness to use its balance sheet aggressively and loose terms of the covenant-lite credit facilities will enable the company to maintain these financial policies going forward. The company will not be required to comply with financial maintenance covenants unless the revolver is drawn by more than 25%, the point at which a springing leverage ratio test with equity cure rights would apply. The credit agreement is also expected to have a carve-out provisions allowing an additional $50 million (over 20% of the initial term loan size) without any incurrence test and unlimited additional debt subject to incurrence tests for both pari passu and junior debt. These factors limit the consideration given to the prospective improvement in key credit metrics.

Today's actions:

..Issuer: Osmose Holdings, Inc.

....Corporate Family Rating, Affirmed B2;

....Probability of Default Rating, Affirmed B2-PD;

....$25 million Senior Secured Revolving Credit Facility, Assigned B2 (LGD4);

....$235 million Senior Secured Term Loan, Assigned B2 (LGD4);

..Outlook, Stable

The assigned ratings remain subject to Moody's review of the final terms and conditions of the proposed transaction expected to close in the third quarter of 2014. The ratings on the company's existing senior secured credit facilities are expected to be withdrawn.

RATINGS RATIONALE

The B2 Corporate Family Rating ("CFR") is constrained primarily by a highly-leveraged balance sheet, small size relative to rated peers in the business services industry, and aggressive financial policies that have included multiple dividends, acquisitions, and divestitures. Credit measures are adequate for the rating category with relatively weak financial leverage and owing to low-cost bank debt, relatively strong interest coverage and cash flow metrics. The rating also benefits from favorable industry fundamentals, good market positions, long-term contracts, modest capital spending requirements, and good liquidity.

The principal methodology used in this rating was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Osmose Holdings, Inc. provides utility pole inspection, treatment, and restoration services to investor-owned utilities, cooperatives, municipalities, and telecommunication utility providers. The company also provides additional value-added services such as storm response, manhole inspection, data collection, and engineering services. Osmose has been owned by investment funds managed by Oaktree Capital Management, L.P. since a leveraged buyout transaction in early 2012. Headquartered in Atlanta, Ga., the utilities services subsidiary of the company generated $236 million of revenue in 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Benjamin Nelson
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Osmose's B2 CFR; rates bank debt B2
No Related Data.
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